For decades the stock exchange industry has been very static and nationally oriented. However, this situation has changed markedly within the past couple of years.
The Copenhagen Stock Exchange was among the first exchanges in the world that ventured to share a trading system with another exchange. In June 1999, we transferred Danish shares to the SAXESS trading system which the Swedish exchange uses, and as a result the NOREX Alliance became a functional reality.
From the autumn of 2000 it also became possible to trade bonds in the SAXESS trading system. We and our NOREX partner in Stockholm took advantage of this possibility, and the trading of Danish and Swedish bonds was also transferred to the common trading system. At almost the same time Iceland Stock Exchange connected its share and bond markets to SAXESS and Oslo Børs will follow in the first half of 2002. The share and bond markets of the four NOREX exchanges will then be connected to the same trading system.
As a result, it has become much easier to attract new foreign members and with them more foreign investors. It also means that the trading system chosen by the NOREX exchanges is well positioned to be among the surviving stock exchange systems in Europe following the probable rationalisation.
The NOREX Alliance is, as mentioned, the first alliance to establish a joint trading platform. Moreover it is also the first alliance to have launched a common rulebook on trading and membership.
The Alliance offers cross-membership on the respective exchanges for intermediaries. The system is based on single point of liquidity, i.e. a financial instrument only needs to be listed on one of the exchanges in the Alliance. Furthermore, an important purpose of the Alliance is to create transparency. NOREX offers a complete market overview at any given moment. Real-time market information from the NOREX exchanges is available for members and other interested parties.
The NOREX Alliance has succeeded in being loyal to its members. Through the NOREX Member Rules, which became effective in the autumn of 2001, the Alliance has realised the members' three key requests for easy and inexpensive access to the Nordic securities market:
- One trading system -- SAXESS
- One education for the dealers
- One rulebook -- NOREX Member Rules.
Meeting the needs of investors
Common industry classification
The harmonisation within the NOREX Alliance has made it easier to trade, not only for members but also for investors, who now have better possibilities of comparing the Nordic equity markets with each other and with other markets outside the Alliance.
Last year the NOREX exchanges in Denmark, Norway and Sweden adopted the same system for classifying listed companies. We made an agreement with Morgan Stanley CI to adopt its company classification system to replace the countries' previous industry classifications. In the NOREX Alliance we did not want to invent our own model when we could choose to adopt the one alreadyemployed by most investors in the world. One of the consequences of this decision was that the almost 20-year-old Danish division into seven industries disappeared in June 2001 and was replaced by 10 main sectors, which again are divided into three sub-levels.
Following this it has not only become easier to compare Nordic companies with each other but also with corresponding companies in other countries. To support this we introduced an entirely new index universe, with both price and performance indices on the top three levels of the sector classification calculated according to common Nordic rules -- as well as a new benchmark index. The latter consists of between 50 and 80 shares chosen in such a way that each exchange's benchmark index is representative of the individual country's total market. In a further innovation, the index is free float adjusted.
Common rules
The next step is to look at the listing rules and disclosure requirements. The vision is to establish a set of NOREX rules that represents best practice in Europe. The initial stage is the carrying out of an extensive comparison of the rules in the three countries, using London as a benchmark. This analysis will soon be finished. The next stage involves planning for the realisation of the vision. This can hardly be done in one step. It will most likely be broken down into several stages, as we will be assessing the necessary amendments to the individual countries' legislation, e.g. insider rules, rules on notification about shareholdings and takeover rules.
What is good enough?
The task of the Copenhagen Stock Exchange and the other NOREX exchanges is to ensure a well-functioning marketplace.
Investors are increasingly trading across borders, and the traders are moving with them. The NOREX Alliance has established solutions which make it very easy for the large traders in Europe to trade Nordic shares and bonds, and this is one of the reasons that the Copenhagen Stock Exchange is also able to engage them as members.
The challenge in the years ahead
The settlement of trades must be improved
The greatest barrier now is the settlement of securities across borders. This remains complicated and expensive. As has been the case with the trading system up till now, each country also has its own set of rules in this area and its own securities centre. What is needed is fewer system and rules that are more uniform. But bringing about these changes is slow.
Last year the European markets began implementing central counterparty solutions. For instance London, virt-X, Euronext, Deutsche Börse and the exchange in Milan have adopted this model. We are consequently entering a new stage that will reduce costs in connection with cross-border securities trading.
The first step was to understand that the costs of trading across borders needed to be reduced. Historically, each country has had its own exchange and each exchange its own trading system. This is far too expensive in an internationalised world. This is why in a few years time Europe will have between two and four dominant stock exchange trading systems, each used by several exchanges. In this area, Denmark is doing quite well. The Copenhagen Stock Exchange was, as mentioned, the first exchange in the world to trade shares in the same system as an exchange in another country. Soon we will be four countries connected to this trading system with both shares and bonds. Evidently, we have chosen a solution that enables us to survive.
Reducing the cost of cross-border settlement
The next step involves the value chain. When a share has been traded, settlement must be effected. This is where securities centres come in. A securities centre registers who owns the securities and it is therefore their responsibility to record changes in ownership etc. Historically, securities centres have also been highly nationally oriented, and they move shares efficiently between individuals inside borders. But it is rather expensive to trade shares across borders, and the reason for this is not the trade itself but the settlement and thus the transfer of ownership and money from one country to another.
The major international brokers, exchanges and securities centres are increasingly pushing to reduce the costs of settlement. In some countries it is ten times more expensive to trade a foreign share than a national share. Great potential efficiency gains therefore exist, which should benefit investors.
Establishing a central counterparty
A central counterparty solution makes it possible to reduce the costs of cross-border share trading. Today, share trader A is counterparty in a trade with share trader B. The new function means that share trader A uses the central counterparty as counterparty instead of share trader B. The counterparty risk is in this way eliminated, but the central counterparty must receive payment for this. However, at the same time the central counterparty enables the netting of numerous transactions so that the number of settlements is reduced. In the aggregate, capital is saved. Obviously, the advantage of having a system with a central counterparty is greatest if there are only very few central counterparties in Europe.
However, the amount saved must come from somewhere. In the securities centres the number of transactions will be reduced, and this will put pressure on these businesses to reduce costs. And in the arena of international share trading, the large deposit banks will have fewer transactions to handle, also pressuring them to reduce costs.
It is a well-known fact that when advantages arise for some there will be disadvantages for others. Conflicting interests are thus inherent in this problem.
Local status and continued internationalisation
In the Nordic region it has so far been difficult for the exchanges to obtain recognition of the need for a central counterparty. But the question is, whether the Nordic equity markets -- including the Danish market -- do not run a sizeable risk if this facility is not offered in our markets. The major international share traders insist on a central counterparty, and they will have it in the large marketplaces in Europe. What will the consequences of this be? One likelihood is, of course, that other exchanges in Europe will offer trading in the major Nordic shares -- and that the large international share traders will choose to trade the Nordic shares there because these exchanges have a central counterparty.
Internationally, the Copenhagen Stock Exchange is a small exchange. To justify our place in the future stock market, it is crucial that we take on an active approach to this development, which is around the corner. It is therefore our objective to keep internationalising the Danish marketplace to attract more foreign investors that can contribute to increasing the liquidity in Danish shares. In this connection the NOREX Alliance is a considerable strength, and most of our projects take place in close cooperation with our Nordic partners.
One of the core objectives for the coming year is to sharpen our competitive edge in relation to international investors -- especially in connection with the settlement of share trades. Today, all partners of the NOREX Alliance operate with local clearing and settlement, and to foreign investors this solution is highly expensive and cumbersome. This is why the partners in the NOREX Alliance, together with the other Nordic market participants, are at present discussing the question of whether a common Nordic central counterparty should be established -- in line with the other European markets. The Copenhagen Stock Exchange will be working to resolve this matter during 2002.
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